Question

1. If the real rate of return is 0 percent, and the inflation rate is 3 percent, then the nominal interest rate must be:

a. 0 percent.

b. 3 percent.

c. −3 percent.

d. 6 percent.

2. If inflation was zero percent, nominal interest rates would be:

a. equal to real interest rate.

b. larger than real interest.

c. smaller than real interest.

d. at the optimal rate.

3. The natural rate of unemployment:

a. occurs at the economy's potential level of output.

b. is zero.

c. will cause a steady rise in the price level.

d. All of these statements are true.

4. While the __________ is not important, the _________ can have a big effect on economic behavior.

a. price level; unpredicted change in the price level

b. unpredicted change in the price level; price level

c. price level; predictable change in the price level

d. predictable change in the price level; price level

5. If a government pursues the industrial policy of import substitution, it is:

a. protecting domestic industries until they are efficient enough to compete in the world market.

b. giving consumers incentive to substitute imported goods for those domestically produced.

c. encouraging domestic industries to ship imports to other countries.

d. mandating that imports can only be sold if the domestic economy does not produce that particular good.

Answer 1

We must know that,

Real interest rate = Nominal interest rate - inflation rate.

Ans 1: (B) 3 percent

Ans 2: (A) Equal to real interest rate

Ans 3: (A) occurs at the economy's potential level of output. When the economy reaches potential level, the unemployment rate that exist at that level is called natural rate of unemployment.

Ans 4: (C) price level; predictable change in the price level , unpredicatble price changes can have several policy implications.

ans 5: (B) giving consumers incentive to substitute imported goods for those domestically produced. In this policy, government tries to imply that the consumers must use domestically produced goods.